R5 Flashcards
(50 cards)
1
Q
Authority for tax treatment of an item
A
aka primary authoritative sources
- IRC and other statutory provisions
- regulations
- revenue rulings and US Treasury Department
- court cases
- IRS Publications NOT primary
2
Q
Listed Transaction
A
transaction specifically identified by the Secretary of the US Treasury Department as a tax avoidance transaction
3
Q
More Likely Than Not
A
> 50% likelihood tax position being upheld by courts
4
Q
Negligence
A
failure to make a reasonable attempt to comply w provisions of internal revenue law OR to exercise ordinary and reasonable care in preparation of a tax return
- also include failure to keep adequate books and records or substantiate items properly
5
Q
Reasonable Basis
A
> 20% tax position upheld
- higher than not frivolous or not patently improper
6
Q
Reportable Transaction
A
transaction where information is required to be included w a return because it’s a type of transaction which the Secretary of the US Treasury Dept has determined has potential for TAX AVOIDANCE or TAX EVASION (illegal)
7
Q
Substantial Authority
A
> 33% but less than 50%
objective standard involving analysis of the law and application of the law to relevant facts
8
Q
Tax Return Preparer vs Tax Practitioner
A
- tax return preparer does it for compensation
- tax practitioner practice before the IRS: attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents
9
Q
Tax Shelter
A
any plan or arrangement w significant purpose of avoidance or evasion of federal income tax
10
Q
Understatement of Taxpayer’s Liability due to “Unreasonable Position” by Tax Return Preparer
A
position is unreasonable unless:
- substantial authority, undisclosed, no tax shelter or reportable transaction
- reasonable basis, disclosed, no tax shelter or reportable transaction
- more likely than not, tax shelter or reportable transaction
penalty
- greater of 1,000 or 50% of tax preparer compensation for the service
if
- understatement due to unreasonable position
- preparer had knowledge or should have known about the unreasonable position
- position lacks reasonable basis
11
Q
Underpayment of Taxpayer’s Liability due to Willful or Reckless Conduct of Tax Return Preparer
A
- willful, reckless, intentional disregard
- preparer not required to obtain supporting documentation unless reason to suspect accuracy of info provided by client
penalty
- higher than negligent
- greater of 5000 or 50% of compensation for service
12
Q
Failure to Provide Copy of Tax Return
A
tax preparer required to provide taxpayer a copy of the tax return or refund claim
13
Q
Failure to Sign Tax Return or Refund Claim
A
gotta sign it
penalty doesn’t apply if due to reasonable cause and not willful neglect
14
Q
Failure to furnish Tax Identification Number of preparer
A
penalty doesn’t apply if due to reasonable cause and not willful neglect
15
Q
Failure to Retain Records Propertly
A
required to keep copy of return or claim or listing of name and ID of each taxpayer for 3 years
16
Q
Negotiation of IRS Refund Check
A
tax return prepare who endorses or negotiates an IRS refund check issued to taxpayer
17
Q
Failure to be Diligent in determining eligibility for Earned Income Credit
A
due diligence requirements:
- eligibility checklists
- computation worksheets
- reasonable inquiries to the taxpayer
- record retention
18
Q
Aiding and Abetting Understatement of Tax Liability
A
- penalty applies to any person
- IRS has burden of proof
- civil penalty
- 1000 for taxpayers 10,000 for corps
19
Q
Wrongful Disclosure and/or Use of Tax Return Info
A
- civil penalty to tax return preparer and guilty of misdemeanor
- add. penalties for:
a) disclosure to enable third party to solicit business or
b) knowing or reckless disclosure of info
exceptions:
- consent of client
- court order/subpoena
- prep of state and local tax returns and declaration of estimated tax
- quality and peer reviews
- administrative orders
- SEC audit, GAAP/GAAS
20
Q
Circular 230
A
addresses IRS practitioners: attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers
- rules governing authority to practice
- must provide info to IRS or inform IRS of someone who would know
21
Q
Practice by Former Government Employees
Circular 230
A
potential conflicts of interest
- if personally and substantially participated in a matter involving specific parties, never represent or assist w respect to that particular matter
- if had official responsibility, can’t represent for 2 years
- can’t appear before IRS to influence any US Treasury Dept amployee regarding a rule if participated in development of the rule or within 1 year before leaving government they had official responsibility for that rule
22
Q
Fees
Circular 230
A
can only charge contingent fees before the IRS:
- IRS examination or audit
- claim solely for refund of interest and penalties
- judicial proceeding arising under IRC
- never can charge an “unconscionable fee”
23
Q
Solicitations
Circular 230
A
Advertising
- can’t use false or misleading advertising
- if radio/tv must keep for 36 months a recording
- if direct mail/e commerce, keep for 36 months who they sent it to
Written Fee Schedule
- if published written fee schedule, can’t charge more than published fee for 30 days after publication
24
Q
Best Practices for Tax Advisors
Circular 230
A
- communicating w client the terms of engagement to determine client purpose and use for the advice
- conclusion supported by law and facts, NOT the probability of getting caught
- advising client about importance of conclusions, like whether client can avoid penalties
- acting fairly and w integrity
25
Return of Client Records
Circular 230
GR at request of client, return all client records
- exception: if state law allows practitioner to retain records in case of fee dispute
extra:
but must return client records for tax return and allow client to review and copy client records related to fed tax obligations
26
Written Advice
Circular 230
- must be reasonable factual and legal assumptions
- consider all relevant facts and circumstances
- identify and ascertain facts relevant
- NOT take into account possibility tax return won't be audited or matter won't be raised on audit
27
Competence
Circular 230
practitioner must be competent to practice before IRS
- may become competent through various methods
- like consulting or studying the relevant law
28
Advisory Committees
Circular 230
- established by IRS Director of Office of Professional Responsibility
- 6 individiuals authorized to practice
- balance of attorneys, accounts, and agents
- recs regarding professional standards
29
Procedures to Ensure Compliance w Circular 230
- Internal Controls
- for those overseeing a firm's federal tax practice
- disseminate, educate, test
failures to comply
- fails to have adequate procedures
- fails to ensure procedures are followed
- knows or should know of noncompliance and doesnt take prompt action to correct
30
Incompetence and Disreputable Conduct/Sanction
(not acting in good faith)
Circular 230
Secretary of Treasury may SANCTION a practitioner for being incompetent or disreputable
- convicted of fed tax law crime or any crime w dishonesty
- giving false or misleading info
- willfully evading payment of fed tax
- willfully assisting others to evade fed tax
- failure to timely remit funds received from client
- using threats, offering gifts, inducement, to influence an official action by IRS employee
- recklessly giving false opinions
- willfully failing to sign a tax return
other SANCTIONS
- willfully or recklessly violating
- possible sanctions include censure and suspension or disbarment before the IRS
- IRS can also impose monetary penalties, not exceeding gross income
31
State Boards of Accountancy
- only ones who can give or revoke CPA licenses
- 3 broad categories of misconduct:
1. misconduct while performing acct services
2. misconduct outside scope of acct services, like drugs that impair the acct's liability to perform
3. criminal conviction
they investigate misconduct then conduct a formal hearing:
- board must find it was more likely than not
- accountant entitled due process of law
- judicial review
5 penalties they can impose:
- suspension or revocation of license
- monetary fine
- censure
- probation
- CPE course requirements
32
AICPA and State CPA Societies
- Code of Professional Conduct applies to all AICPA and many state CPA societies
- Joint Ethics Enforcement Program (JEEP)
enforcement of their codes of conduct by means of a single investigation
- Disciplinary Action
can sanction their members but can't revoke CPA licenses
suspend or terminate memberships w/o hearing
- Possible Sanctions (no monetary or criminal)
expulsion from AICPA or state CPA society
suspension of membership in ^
requirement of CPE courses
33
IRS Disciplinary Actions
Criminal Penalties
- for any person who counsels or prepares tax return in a fraudulent or false manner
Civil Penalties
- may prohibit an acct from practicing before IRS
- may impose fines
34
SEC
- civil penalties, investigate criminal
civil: fine limit 100,000 (500,000 for a firm)
- suspend or revoke acct's right to practice before SEC, including right to sign documents required by Securities Act of 1933 and Securities Exchange Act of 1934 if
- lacks qualifications
- lacks character/integrity
- unethical
- willfully violated fed laws or regs
- convicted of felony or misdemeanor for moral stuff
35
Title I- PCAOB
SOX
Public Company Accounting Oversight Board
- composed of 5 members
- 2 CPAs & 3 non
- board subject to oversight by SEC
- duties: register public acct firms, establish rules for preparation of audit reports, and conduct inspections, investigations, and disciplinary proceedings for public acct firms
Inspections
- firms that audit 100+, inspect annually
- others, inspect every 3 years
Registration w PCAOB
- only registered may prepare audit reports for SEC issuer
Auditing Standards
- audit documentation/workpapers kept for 7 years (criminal penalties will apply)
- provide concurring or second partner review of each audit
- describe scope of testing internal controls in audit report
Sanctions
- suspension or revocation of PCAOB registration
- monetary penalties
- censure
- profesional education requirements
36
Title II - Auditor Independence
SOX
Prohibited services to audit clients:
- everything except tax services are permissible if pre-approved by audit committee
- audit partner rotation every 5 years
- audit firm can't employ issuer's CEO, CFO, Controller, or Chief Accounting Officer for 1 year after the audit
- must report to Audit Committees
37
SOX
improve investor confidence in financial reporting
1. auditor
2. audit committee
3. officers
4. internal controls
38
Title III - Corporate Responsibility
SOX
Audit Committees
- address problem of inadequate board oversight
- directly responsible for appointment, compensation, and oversight of work of public acct firm employed
- auditor reports directly to AC
- AC resolves disputes b/w auditor and management
- AC members are members of Board of Directors but otherwise independent
Corporate Responsibility
- CEO and CFO must sign annual and quarterly reports including assertions that:
a) they reviewed the report
b) doesn't contain untrue statements or omit material info
c) financial statements fairly presented
- they also sign to assume responsibility for Internal Controls
- that ICs have been designed, evaluated, and report includes a conclusion about the effectiveness of the ICs
- signing also asserts they've made the following disclosures to AC and auditors:
a. significant deficiencies of ICs
b. any fraud involving management or an employee w sig. roll in ICs
- if required to prepare an accounting restatement due to material noncompliance, the CEO and CFO reimburse:
a. bonuses or equity based compensation and
b. gains on sale of securities during the 12 months
39
Title IV-- Enhanced Financial Disclosures
SOX
Disclosures in Periodic Reports
- all material correcting adjustments identified by auditor
- all material off-balance sheet transactions (contingent obligations and unconsolidated subsidiaries)
- pro forma financial statements
- use of special purpose entities
Conflict of Interest Provisions
- Issues are GR prohibited from making "personal loans" to directors or executive officers unless made in ordinary course of issuer's consumer credit business
Disclosure of Transactions b/w Management and Principal (10%) Stockholders "related party"
- must file report of how many shares they own
Management Assessment of Internal Controls
- 10K and 10Q must include internal control report stating:
- management responsible for establishing and maintaining ICs
- assessment of effectiveness of ICs
- auditor must attest to management's assessment of IC
Code of Ethics for Senior Financial Officers
- disclose whether or not issuer has adopted a code and if no code, must disclose why
- promote honest and ethical conduct, full, fair, accurate, and timely disclosures, compliance w laws and rules
Disclosure of AC Financial Expert
- at least 1 member has to be a financial expert
- no name but must disclose existence or reason why they dont have one
- financial expert qualified through mix of education and experience
Enhanced Review of Periodic Disclosures by Issuers
- SEC required to review disclosures on a regular and systematic basis and consider the following
- material restatements
- significant volatility
- largest market capitalization
- disparities in price to earnings ratios
- significantly affect any material sector of the economy
40
Title VIII-- Corporate and Criminal Fraud Accountability
SOX
SOX "federal law"
Criminal Penalties for Altering Documents
- 20 years for individuals who alter
- 10 years for auditors who don't retain workpapers
Criminal Penalties for Securities Fraud
- imprisoned for 25 years
Whistle-Blower Protection
- can't be discharged, demoted, suspended, threatened, harassed, etc.
- compensatory damages:
- reinstatement w same status
- back pay w interest and
- compensation for any special damages
Nondischargable Debts in Bankruptcy
Statue of Limitations for Fraud- earlier of 2 years after discovery of facts or 5 years after violation
41
Federal Legislative Process
1. begins in House of Reps (specifically House Ways and Means Committee), voted on and approved by House
2. goes to Senate (specifically Senate Finance Committee), voted on and approved by Senate
3. Normally there are difference b/w House and Senate versions so go to Joint Conference Committee
4. Compromised bill then approved by House and Senate
5. President signs or vetoes
6. Veto can be overriden by 2/3 vote of both House and Senate
42
IRS Audit Process
part of the enforcement system to ensure the "voluntary" assessment and payment is actually occurring
- return may be audited for variety of reasons
Discriminant Inventory Function System (DIF) to select tax returns most likely to contain errors and yield sig. amount of add. tax revenue upon audit
- specific criteria not disclosed but clear that certain groups are subject more frequently: individuals w gross income > 100,000, self employed individuals w substantial business income and deductions, and cash businesses
- if information returns like W-2s and 1099s don't match amounts reported on return
- itemized deductions in excess of norms for certain income levels
Review for Mathematical Errors upon submission + ensure SS #s and signatures are not missing
- if error, sent a revised computation and explanation and amount due or refund check
- "direct correspondence audit" doesn't require formal meeting w IRS
Formal Examination
- office audit: local
- field audit
After Audit
- may accept or recommend changes
- if accept, taxpayer signs Form 870 that waives right to receive statutory notices and petition US Tax Court and right to appeal process
- form 870 normally closes the case but IRS can assess for Fraud
- if changes, then move on to appeals
43
IRS Appeals Process
- if agreement can't be reached, taxpayer received copy of Revenue Agent's report and 30 day letter for right to request an administrative appeal
- or if appeal isn't requested, request notice of deficiency; taxpayer can't take case to US Tax Court before IRS sends notice of deficiency
- Appeals Division is authorized to settle all tax disputes based on hazards of litigation
- If agreement met w Appeals Division, taxpayer signs Form 870-AD, normally considered binding on both parties
- if no agreement, entitled to take case to
1. US Tax Court
2. US Court of Federal Claims
3. US District Court
44
Federal Court System
When taxpayer and IRS can't reach an agreement using administrative appeals process, settled in Federal Court System
- either IRS or taxpayer can initiate the process
Burden of Proof
- most litigation, party bringing case has burden of proof (usually taxpayer)
- certain situations, IRS has burden when taxpayer has introduced credible evidence and has maintained books and records
45
US Tax Court
- only hearts federal tax cases (unlike district court)
- unique: may litigate without first having paid the disputed tax in full
- 1 judge, no jury + judges travel (19 judges)
- can't be taken to tax court before note of deficiency
Appeals
- US Tax Court is a national court and may be appealed to various US Courts of Appeals
- Tax Court will follow the geographic Court of Appeals that has direct jurisdiction over the taxpayer
46
US District Courts
- general trial courts of US fed court system
- both civil and criminal (not just tax cases)
- district court has jurisdiction over location of taxpayer
- 1 judge, jury trial (unique)
Must First Pay Disputed Tax Liability and Sue IRS for Refund
- 3 days from date filed or 2 years from tax paid, whichever is later
47
US Court of Federal Claims
- nationwide court jurisdiction over most claims for money damages
- taxpayer must pay disputed tax and sue for refund
- 16 judges, no jury
- Court of Fed Claims follows decisions of Federal Court of Appeals not the geographic Court of Appeals
48
US Court of Appeals
(tax court and district)
- 3 judge panel, no jury
- Geographic courts handle issues from tax or district court
- Federal Court of Appeals handles cases that originate in the Court of Federal Claims
- usually has final word on federal tax matters bc the Supreme Court hears very few tax cases
49
US Supreme Court
highest court in the nation
- all 9 justices hear all cases that they agree to consider (granting a "writ of ceriorari")
- tax cases are rare
50
Penalties Imposed on Taxpayers
both civil and criminal
- Earned Income Credit penalty
- Failure to Make Estimated Income Tax Payments if 1000+ estimated tax and withholdings don't cover 90% of current year tax or 100% of last year's (110% for AGI >150,000)
- Failure to File Penalty: 5% per month not filed, can't exceed 35% of amount of tax due
- doesn't apply if due to reasonable cause and not due to willful neglect
- Failure to Pay Penalty: 1/2 of 1% per month, can't exceed 25% of unpaid tax
- exception if 90% paid by due date and remainder paid by extended due date
- Negligence Penalty for Understatement of Tax: 20% of understatement (defense: reasonable basis even if undisclosed)
- Penalty for Substantial Understatement of Tax: 20% but more difficult to avoid (defense: reasonable basis and disclosed, substantial authority and undisclosed but no tax shelter)
- Fraud Penalties: 75% of understatement of tax
- civil penalties: IRS must prove preponderance of evidence
- criminal penalties: IRS must prove beyond a reasonable doubt willfully, intentionally, recklessly
